Brazil, Colombia Are Citi’s Picks Among LatAm Currency

The potential for any delay in interest rate increases in the U.S. has been good news for emerging markets, and this could help Latin American currencies extend recent gains, write Citigroup’s Kenneth Lam and Dirk Willer.

With the likelihood of a June rate hike receding, they see a “month or two of calm” ahead, although they admit that unless the euro can at least stabilize, Latin American currencies won’t do very well—other than against the euro itself.

Their picks are the Brazilian real and the Columbian peso—which have also been the best performers in the region since April 2: The Brazilian authorities don’t want to have a much stronger currency, and as USDBRL approaches 3.00 the risks of BCB rolling fewer swaps next month rise.

As such gains may be limited from here. As for COP, of course crude oil is a very dominant driver. Indeed, they write that Colombia recently got a “triple dose of positive news” given that the Fed seems unlikely to raise rates in June, weakness in the U.S. dollar lessens inflation-pass through pressures, and the price of oil has been stabilizing.

On the other hand, they expect the Chilean peso to take “a breather:” The star performer in Latam since March FOMC, the Chilean peso, may need to take a breather. We still remain constructive on the peso based on Chile’s improving fundamentals, but positioning is becoming crowded. (Figure 37)

Short CLP positions by offshore investors are the lowest since April 2013. The recent better (lower) than expected CPI print also made it less likely that the BCCh would turn even more hawkish from here.

While they are not likely to cut rates, rate differentials have narrowed and that has had some impact on the CLP at the margin.

barrons.com